Thank you for coming to watch this conversation. I hope you all recovered from yesterday's game. My name is Sonya Kim, and I am one of the co-founders of 3F. 3F co-founders of 3F. 3F is a new credit storage protocol built on Morpho, and we allow for automated and customized leverage for our LPS, um, RWA yields.
So today I want to talk to you a little bit about the connection between DeFi and TrackFi. As an introduction, I actually have experience with TrackFi. I want to say that I'm young, but I have 10 years of experience as an equity portfolio manager before, um, diving into DeFi. I started at a small consulting company called Stakehouse Financial back in 2023. And on January 24, we launched the first-ever Morpho repository.
Today, you may know Steakhouse Financial as one of the largest risk curators on Morpho. So I would say I have some qualifications to speak on behalf of both TRFI and DeFi. So, if we look at some of the strengths and challenges of both Trafi and DeFi, I think we will reach a consensus that these two platforms are actually complementary to each other. Trifi, you know, over the years of its formation, it has created diversified cash flows from real economic activity, which are packaged into funds, securities, and various instruments. Over time, the industry has evolved, specializing in different sectors and sub-sectors.
So we have strict underwriting from, you know, CFAs, fund managers, market experts who really focus on one sub-segment of the industry. And, of course, over time, legal remedies were established. But this is exactly what DeFi is struggling with. As you may be familiar with, we don't have many sources of on-chain revenue. What we have seen over the past few years is that bootstrapped startups are trying to incentivize their early adopters with token with token incentives.
But, of course, token of course, token incentives themselves are not real. Um, and the annual compounded annual yield ( annual compounded annual yield ( APY) fluctuates depending on the prices of these tokens. There were also many cases of unstable underwriting. Um, I don't know if you in the audience were affected or, you know, negatively impacted by the OPSAC hack, um, the smart OPSAC hack, um, the smart contract hack. But the last few months have been really quite painful for the DeFi user.
Um, as we saw with companies like Stream Finance, which had unstable underwriting that was against stablecoins, and Resolution, which was unfortunately affected by the Infinite Mint hack. So, as you can see on this slide, what Trafi brings can really help DeFi. But Trafi is not just song and dance. Um, it's a very competitive space. There are many different options.
And especially for asset managers that are active, meaning they actively underwrite, um, underlying investments, they've faced big challenges with the growth of passive products or ETFs. Often they feel the pressure of commissions, and, uh, their priority as a result is trying to find new sales channels and new additional customers. Additionally, leverage or access to leverage and financing is often limited by institutions limited by institutions . As a retail, uh, asset owner, imagine you go to your regular commercial bank, like Chase or Bank of America, and you say, “Hey, I have collateral here. Could you give me a loan for it?
They will probably laugh at you and say, "No, we can't do that do that ." Uh, and finally, it's very opaque. Uh, DeFi has actually been around since 2019 on a large scale, but we've already solved all of these problems. We have a global user base thanks to user base thanks to , uh, Ethereum, which was able to raise capital through its permissionless decentralized applications. We have layouts, you know, scalable, uh, DeFi primitives like lending, and welcome, for example, Morpho, who announced today that they raised $175 million in their latest fundraising.
So we continue to extend these primitives that are used by a global user base, and most importantly, it's transparent. Anyone can access these primitives in a transparent way. So, TRFI, in short , wants to enter DeFi because there is a real possibility of commercial distribution that does not exist in the real world. So, RWA, I would say, is one of the bright spots of DeFi right now. This graph speaks for itself.
Uh, we started practically from scratch in 2023, and you can see this growth in the overall RWAS output. Hmm, most of them are US Treasuries, but there is a diversified, uh diversified, uh , set of asset classes that are being introduced to the blockchain now. There are also a huge number of tokenization agents who have been working tirelessly to iron out the fine details, such as what oracles do we use, what navigation reporting do we do, how do we ensure there is legal protection, and is there enough liquidity on the blockchain to support all these assets? These are little things that have been figured out over the years by people who pay attention pay attention . But I would say the issue is practically resolved now.
This is not a problem. Once you have an on-chain presence, what do you do with it? What is on-chain is on-chain presence? Many early innovative asset managers who came on-chain and have assets issued on the blockchain are now asking themselves, how do we scale this? What is its purpose?
Perhaps we can get some answers or inspiration from the tribal world itself. If you look at the simplest, uh, instrument, U.S. Treasury bonds, and look at what they're used for, we quickly realize that they're not just issued and held in people's bank accounts, uh, in people's bank accounts. They do much more.
I'm trying to, uh, you know trying to, uh, you know , classify the types of uses for Treasury bonds. So, of course, you keep them as a means of savings. Uh, that's about 30 trillion in total. But also, various fund managers have pooled U.S.
Treasuries in a new vehicle called money market funds to manage the cash of many corporations, which can then place either U.S. Treasuries or money market funds in the repo market or on collateralized financing platforms to free up even more capital and engage in other economic activities with it. And finally, some of the more specialized hedge specialized hedge funds will take this market structure and try to create more profitable or complex return strategies from it, such as leverage or basis trading. So, we took one instrument, one simple US Treasury bond instrument, and created several different uses for it.
Um, and as a result, we get what we call a higher asset turnover rate. This is really interesting because there are a lot of tokenized assets being issued right now that are simply stored in users' wallets. Then the next question is: can we take this inspiration and create new uses that will ultimately lead to more economic activity from these assets, creating a higher asset turnover rate ? So 3F decided to focus on one very specific use case. Um, it's actually downstairs.
A carry trade, with a notional value exceeding a trillion dollars, is the type of leveraged transaction with the highest asset turnover rate. So if you guys are onchain Dgens, if you have experienced the multitude of profitable stablecoins that have been released, you may be familiar with the concept of a loop. For those who are not familiar, this is a magnifying glass. You deposit your money to buy an asset. You secure it with collateral on a credit market such as morpho.
You take out a loan for it and then buy more of the asset. You provide, borrow, buy, etc. Depending on how many leverage terms or number of cycles you have created, you have the opportunity to continue to increase your profitability. So the math is this: if you have an underlying asset that yields 6%. So you can borrow against this asset as collateral at 4%, you have a spread, a positive luff of 2%.
Let's add some leverage to it . Let's say you want to set a leverage of 5 times. Then you can magically turn an asset with a 6% turn an asset with a 6% return into an asset with a 14% return. Suddenly, a boring asset now looks quite attractive to a DGEN user or, more generally, to change allocators who want to be compensated for taking on multiple levels of risk. However, if we were to apply this looping mechanism, RWAS, which have calculation delays calculation delays , because the real infrastructure is much less efficient than the blockchain infrastructure, we would run into problems.
Hmm, I strongly recommend that interested people later go to my Twitter profile and look at the long form I wrote called RWA looping, which doesn't work. But to get into the details of native DeFi of native DeFi assets, cryptocurrency assets that settle instantly on the blockchain, the loop is very simple and trivial with code. What you would do is buy, say, 1 million of the underlying asset, which you can instantly borrow via flash borrow via flash credit, say, 4 million, to bring your exposure up to 5 million, still with 5x leverage. You buy an asset, collateralize it with Morpho or A, or under it, and return a flash return a flash credit for one block in 12 seconds during the main block. However, you cannot do the same to leverage RWA to pass cash flow.
You would need to buy $1 million of an asset, wait until the asset settles, which as you know in Treasury bonds or other fixed income products is usually T+ 1. Secure it in the credit market. Do it again the next day. Buy RWA worth $800,000. Wait until the asset issuer provides you with the asset the next day and do it again.
So if you automatically reach 5x leverage, let's say you get into 20 cycles, it will take you 20 days to reach a 5x leveraged position , and the same amount of time to exit. 20 days to reduce your position. This is very buggy. And I don't know how many people would have the patience to do the same thing over and over again for 20 days for 20 days to reach 5x leverage . Historically, this has been one of the bottlenecks for RWAs to seamlessly integrate into the D5 protocol to allow leverage.
So what should we do? 3F is trying to create a new primitive that will allow users to leverage with a single click on RWAS. We are solving this very problem of settlement delays, which are exacerbated as soon as you try to leverage through Defy Rails. The mechanism is quite simple. We are actually trying to simulate the flash credit mechanism, except that the flash credit is not given to you in one block and is not calculated in one block, but imagine that one block in the real world is actually one day.
We call those who provide flash loans, or flash loans in real life, I call it bridge brokers or BFS. 3FBS provides us with a leveraged loan in a completely transparent manner on the blockchain as soon as the user requests a leverage position. 3F then takes this bridge loan along with the user's equity or deposit and contributes it to the RWA. We wait one day for it to settle. We immediately secure it with collateral in the lending protocol, in our case Morpho, and we fund the bridge intermediary by raising an over-collateralized loan against the asset.
So, in this case, to explain again, you are the user. You need 5x leverage on a fixed income fund. You have $1 million in capital. Once you instruct the 3F protocol that you want to establish this leverage position , the protocol asks the bridge brokers based on best rates for a bridge loan of $4 million. 5 million are subscribed to Morpho's bail.
You can get an oversecured loan of $5 million. Four million is returned to the bridge intermediaries. The result of this is that you can now create leverage positions on RWAS in a single settlement cycle, rather than compounding settlement cycles over multiple cycles. Here is an example of a new product we launched together with Falcon X, one of the multi-level market makers. Falcon X has installed a private lending tool on the chain.
This tool is essentially an underwriting service that Falcon X provides to its institutional clients. The credit they provide to their institutional clients who place collateral with them in an SPV structure. And this SPV structure was tokenized by a technology provider called Pareto and implemented on the blockchain. 3F credit vaults use this tool and allow users to customize their leverage on top of this asset. Currently, you can leverage up to 6.
5 times more than 33F, depending on your own risk appetite. Let's look at the math. Falcon X's core clients borrow funds with overcollateralization at 7.5%. In other words, the intrinsic yield of this private credit bolt is 7.
5%. You can secure this instrument with collateral and borrow against it on Morpho at 5.5%. There is a 2% spread that you can leverage through 3F. If you maximize leverage now, you can get over 20% real returns.
So we can't do it on our own. The beauty of DeFi is that we build small primitives all over the world on the blockchain, and people can build on top of each other to create a larger, more reliable, and more powerful ecosystem powerful ecosystem . To give you an idea of the number of players needed in our ecosystem to make this work. First, we have traditional asset managers, tokenization agents, who bring interesting assets to the blockchain, so-called RWA shares. We want to focus on bringing quality assets to the blockchain to limit the number of hacks and rug attacks that we have seen in DeFi time and time again .
Then there are Morpho's creditors. They want to borrow money against reliable collateral that won't go down to zero, become overly strong, or turn out overnight that $90 million has disappeared from the fund . We have had enough of that and I think lenders are very cautious now to lend against prime assets and we believe we have an opportunity to attract quality RWA issuers to provide Morpho lenders with quality returns. As I mentioned, bridge brokers or BFs are new organizations that enable this efficient cycle. They earn revenue for expanding the short-term bridge, acting as a connective tissue between the speed of the blockchain and the speed of the real world.
Finally, leveraged LPs want to enhance profitability. They want to do something different that can't be achieved in the real world, using the same underwriting rigor and tools that we've already honed over time in the real world. And finally, the liquidators. Liquidators are opportunistic providers of income capital who want to earn countercyclical returns when someone is too protected by creditors, foreclosing on collateral and restoring integrity to creditors, receiving a premium yield premium in return . So these five players in the 3F ecosystem are really important to making this all work and creating a new primitive onchain using old assets.
I want to end with a meme. I feel like my energy is dropping a bit. For RW to succeed on- chain, I think we really need to focus on use cases that are n't available in the real world. We are a real world. We are a group of very creative, ambitious, and smart people.
I think if we work together, we can create new instances and new sources of revenue using old assets that are currently not even possible in the real world. And the 33F leveraged carry trade is one example of this. Thank you. If you're interested, please visit our Twitter, er, our website. Our app is now available to whitelisted actors , so contact us if you would like to participate in the closed beta.
And I'll also be there if you have any questions and want to chat afterwards . Thank you.
Automatic transcript — names and jargon may be misspelled.